Exam Preparation 4.2

Question Info:

Sometimes in an industry, a firm buys a smaller competitor that uses similar factors of production. At other times a firm buy another firm that supplies it with the raw materials and other inputs for its production.

Question a)

Explain what is meant by the factors of production.

There are 4 factors of production. Land, Labour, Capital and Enterprise. All of these are scarce resources that a firm needs in order to produce goods and services. Land is the natural resources involved, e.g. oil. Labour is the workforce and staff involved, e.g. pilot. Capital is the man-made machinery involved, e.g. planes. Finally, Enterprise are the decision makers and risk takers that make the business run, e.g. Allan Smith. Similar factors of production mean they are using the similar scarce resources to make their business run.

Question b)

Discuss the reasons why some firms remain small.

There are 4 main reasons why some firms remain small. Firstly, is the size of their market is small, they will remain small. For example, if there are only a few number of consumers willing and able to buy their product, expanding the firm would be pointless. Also, because their market and they themselves are small, they can provide a better and more personal service to their consumers. This allows them to perform better. Furthermore, some small firms produce luxury goods and services for a small market. The market is small because only consumers with high incomes could be willing and able to pay such a high price for these luxury or ‘exclusive’ goods and services. Examples of this could be, a sports car, designer clothes, jewellery and luxury holidays.

Another reason why firms remain small is due to the fact that their access to capital is limited. What this means is that they do not have many assets and therefore remain small. For example, a bank will not loan to a sole trader who has access to limited capital because the sole trader might not have collateral to offer, they compete against many larger firms and because they might not be able to create enough revenue to pay back the loan. However, many governments realise that providing subsidies and help to these sole traders in the form of maybe providing grants is actually good for the economy. This is because most small firms have to think of very innovative things and new ideas to compete with the other firms in the same line of production and to help boost trade.

Moreover, the introduction of new technology has reduced the scale of production needed. What this means is that small firms that have access to technology can use this to provide goods and services to consumers all around the world without becoming too big.